[Federal Register Volume 63, Number 17 (Tuesday, January 27, 1998)]
[Rules and Regulations]
[Pages 3819-3830]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1786]


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DEPARTMENT OF TRANSPORTATION

Maritime Administration

46 CFR Part 382

[Docket No. R-158]
RIN 2133-AB19


Determination of Fair and Reasonable Guideline Rates for the 
Carriage of Bulk and Packaged Preference Cargoes on U.S.-Flag 
Commercial Vessels

AGENCY: Maritime Administration, Department of Transportation.

ACTION: Final rule.

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SUMMARY: The regulations at 46 CFR part 382 prescribe the 
administrative procedures and methodology for determining fair and 
reasonable rates for the carriage of dry and liquid bulk and packaged 
preference cargoes on United States commercial cargo vessels. MARAD is 
issuing this rule to prescribe cost averaging as the methodology used 
for determining rates and to implement conforming procedural changes. 
MARAD is also reducing information collection under these regulations.

DATES: This final rule is effective January 29, 1998.

FOR FURTHER INFORMATION CONTACT: Michael P. Ferris, Director, Office of 
Costs and Rates, Maritime Administration, Washington, DC 20590, Tel. 
(202) 366-2324.

SUPPLEMENTARY INFORMATION: Section 901(b)(1) of the Merchant Marine Act 
of 1936 (the Act), as amended (46 App. U.S.C. 1241(b)), cited as the 
Cargo Preference Act of 1954, requires that at least 50 percent of any 
equipment, materials or commodities purchased by the United States or 
for the account of any foreign nation without provision for 
reimbursement, or acquired as the result of funds or credits from the 
United States, shall be transported on privately owned U.S.-flag 
commercial vessels, to the extent that such vessels are available at 
fair and reasonable rates. In 1985, section 901 was amended to exclude 
certain programs from the application of cargo preference and to raise 
the U.S.-flag share to 75 percent on certain others. Upon request, 
MARAD provides fair and reasonable rates (also referred to as guideline 
rates) to U.S. shipper agencies. Section 901(b)(2) of the Act provides 
the authority for MARAD (by delegation from the Secretary of 
Transportation) to issue regulations governing the administration of 
section 901(b)(1). In 1989, MARAD issued regulations at 46 CFR part 382 
(``Rule''), that initially became effective on January 1, 1990.
    Under the 1990 Rule, MARAD established fair and reasonable rates, 
so-called guideline rates, based on each individual vessel's costs 
which applied to the ocean borne portion of cargo transportation. The 
guideline rate consisted of four components: (1) Operating costs; (2) 
capital costs; (3) port and cargo handling costs; and (4) brokerage and 
overhead. The operating cost component of the guideline rate for each 
participating vessel reflected actual historical vessel operating costs 
escalated to the current period by utilizing factors for wage and non-
wage costs. All eligible annual operating costs are added together for 
each vessel and divided by the total number of operating days for that 
vessel to yield a daily operating cost.
    Each vessel's actual reported fuel consumption at sea and in port 
forms the basis of the guideline rate's fuel cost segment. The actual 
fuel consumption of each vessel is multiplied by the corresponding 
projected number of voyage days at sea and in port to calculate total 
units of fuel consumed.

[[Page 3820]]

Current fuel prices are applied to fuel consumed to produce the fuel 
segment of the operating cost component. MARAD then adds the totals of 
the fuel and non-fuel operating cost segments to produce the operating 
cost component for the voyage.
    The capital cost component is presently calculated individually for 
each participating bulk vessel and consists of an allowance for 
depreciation and interest, plus a reasonable return on investment. 
Depreciation is calculated by the straight-line method, based on a 20-
year vessel economic life and utilizing a residual value of 2.5 
percent. However, if the owner acquired an existing vessel, the vessel 
is depreciated by the straight-line method over the remaining period of 
its 20-year economic life, but not fewer than 10 years. Capitalized 
improvements are depreciated straight-line over the remainder of the 
20-year period, but not fewer than 10 years.
    For the purpose of calculating interest expense, MARAD assumes that 
original vessel indebtedness is 75 percent of the owner's capitalized 
vessel cost and that principal payments are made in equal annual 
installments over a 20-year period. To compute the interest cost, the 
owner's actual interest rate is applied to the constructed outstanding 
debt on the vessel. Where the owner has a variable interest rate, MARAD 
uses the owner's rate prevailing at the time of calculation, and if 
there is no interest rate available, MARAD selects an appropriate 
interest rate.
    MARAD allows a return on capital cost (investment), with two 
components, return on equity and return on working capital. The rate of 
return is based upon a five-year average of the most recent rates of 
return for a cross section of transportation industry companies, 
including maritime companies. Equity in the vessel is assumed to be the 
vessel's constructed net book value less constructed indebtedness. 
Working capital is the dollar amount necessary to cover operating and 
voyage expenses. The annual depreciation, interest, return on equity 
and return on working capital are divided by 300 operating days to 
determine a daily amount. The total of these elements is multiplied by 
estimated voyage days to determine the capital cost component used in 
the fair and reasonable rate calculation.
    The port and cargo handling cost component of the guideline rate is 
determined for each voyage on the basis of the actual cargo tender 
terms for the commodity, load and discharge ports, and lot size. Costs 
used to determine the port and cargo cost component are based on the 
most current data from all available sources and verified from data 
received on completed cargo preference voyages. The brokerage and 
overhead component of the guideline rate is the aggregate of the cost 
components for operating, capital and port and cargo handling, 
multiplied by an 8.5 percent allowance for broker's commissions and 
overhead. The total of these four components is then divided by cargo 
tons (which cannot be less than 70 percent of the vessel's cargo 
deadweight) to determine the guideline rate.
    Under the 1990 rule, whenever a vessel carries preference cargo and 
subsequently transports additional cargo prior to its return to the 
United States, MARAD reexamines the guideline rate that it calculated 
for the preference voyage. This reexamination may result in the 
recalculation of the original guideline rate, incorporating the 
additional voyage itinerary, costs and revenues which occurred as a 
result of the carriage of the additional cargo. If a vessel is scrapped 
or sold after discharging a preference cargo, MARAD adjusts the 
guideline rate to reflect the termination of the voyage after 
discharge. If the rate received by the operator for the preference 
cargo exceeds the adjusted guideline rate for the one-way voyage, MARAD 
informs the shipper agency who may then require the operator to repay 
the difference in the ocean freight.

Advance Notice of Proposed Rulemaking

    MARAD decided that revising the Rule could encourage development of 
a modern and efficient merchant marine and reduce government-wide cargo 
preference shipping costs. As a result, on April 19, 1995, MARAD issued 
an Advance Notice of Proposed Rulemaking (ANPRM) (60 FR 19559), 
soliciting comments from the public. In the ANPRM, MARAD identified 
three alternative methodologies, in addition to the existing rate 
methodology, that it was considering. The three alternatives were: 
Foreign Market, Cost Averaging, and Market Based.
    Seven sets of comments were received in response to the ANPRM. 
Commenters represented U.S. shipper agencies, vessel operators and 
industry associations. Comments were offered in support of, and in 
opposition to all four alternatives, with no clear consensus. 
Commenters generally supported the need for guideline rate reform and 
were unanimous that any methodology must encourage investment in 
efficient vessels.

Public Meetings

    After an initial review of the comments received on the ANPRM, 
MARAD believed it would be beneficial to meet with interested parties. 
MARAD held two meetings. On July 12, 1995, members of the shipping 
community and other interested parties met with MARAD. On July 14, 
1995, MARAD met on the same subject with representatives of the United 
States Department of Agriculture (USDA) and the United States Agency 
for International Development (AID), the major government shipper 
agencies.
    As a result of MARAD's experience in determining guideline rates 
and the information received from the ANPRM and meetings with 
interested parties, on February 28, 1997, MARAD published a Notice of 
Proposed Rulemaking (NPRM) to amend the Rule in order to improve the 
fair and reasonable rate-making process. The following is a discussion 
of proposed changes to 46 CFR part 382 and the comments that were 
received during the comment period.

Comments

    Eight groups submitted comments in response to the NPRM of February 
28, 1997. The respondents were the American Institute of Certified 
Public Accountants (AICPA), four U.S.-flag operators that frequently 
carry preference cargoes, a U.S. liner operator, the U.S. Agency for 
International Development (AID), and United States Department of 
Agriculture's Foreign Agricultural Service (USDA). To facilitate 
discussion of the comments, they will be discussed by subject matter.

General

    General comments ran the gamut from supporting most of the 
proposals in the NPRM to urging MARAD not to adopt the rule. Some 
questioned the need for guideline rates or changes to the current 
procedures and their legality. One operator contended that when at 
least three bids are received for a preference cargo the lowest should 
be assumed to be fair and reasonable. Another operator conjectured that 
averaging will introduce arbitrary biases and that it is unfair for 
operators to be expected to accept low rates when the market is poor 
but still be held to ceiling rates if the market improves. The same 
operator postulated that some operators would not be able to recover 
costs at the averaging rate. In addition, several operators were 
concerned that their knowledge of their competitors' cost structure was 
insufficient for them to know how the averaging system would affect 
their rates.

[[Page 3821]]

    The averaging methodology for calculating fair and reasonable 
guideline rates is supported by the legislative history of Section 
901(b)(1) of the Act (Pub. L. 83-664 or the Cargo Preference Act of 
1954).
    The Cargo Preference Act of 1954 requires government agencies to 
take such steps as may be necessary and practicable to assure that at 
least 50 percent (75 percent for specified bulk agricultural products) 
of the gross tonnage of certain government-sponsored cargoes, ``which 
may be transported on ocean vessels shall be transported on privately-
owned United States-flag commercial vessels, to the extent such vessels 
are available at fair and reasonable rates for United States-flag 
commercial vessels.''
    House Report No. 80, 84th Cong., 1st Sess. 3 (1955) sets out the 
reasons for passage of the Cargo Preference Act of 1954, as follows:

    Without some form of assurance of participation by United 
States-flag vessels in the transportation of relief and aid cargoes, 
it became clear that the shipping of the recipient and other 
maritime nations with lower operating costs would be able to 
underbid American-flag vessels and eventually transport much, if not 
all, of these cargoes to the irreparable detriment of the American 
merchant marine.

    H.R. Rep. No. 80 also addressed administration of the Cargo 
Preference Act of 1954 and, as relevant here, discussed the meaning of 
``fair and reasonable rates.'' The question of how ``fair and 
reasonable rates for United States-flag commercial vessels'' should be 
calculated was referred to the Comptroller General of the United States 
by the House Merchant Marine and Fisheries Committee. The Comptroller 
General advised the Committee in a letter dated February 17, 1955, (B-
95832), that--

    ``fair and reasonable rates'' as used in Pub. L. 664 * * * would 
appear to call for reasonable compensation to the operator, 
including a fair profit. However, it seems apparent that the statute 
contemplates average ``fair and reasonable rates,'' which may or may 
not be profitable, or even compensatory, to a high-cost operator.

    Quoted in H. Rep. No. 80, supra, p. 18 (Emphasis in original).
    The Committee agreed with the Comptroller General's construction of 
the law and added,

    * * * it should be understood that at any one particular time 
market rates may be considerably less than [the fair and reasonable 
rate ceiling], in which event the chartering agency should feel free 
to exercise sound business judgment to secure the lowest rates 
possible for the Government.

H. Rep. No. 80, Supra p. 18.

    MARAD has sought to develop a cost-based system which rewards 
efficiency while holding rates in check during peak periods. Guideline 
rate procedures have never guaranteed profitability and the Agency 
believes that the Comptroller's opinion means that full cost (plus 
profit) recovery in the guideline rate is not required for all vessels. 
MARAD also believes that the averaging methodology is fully consistent 
with the Act and that it will be rare that an operator does not recover 
its costs after efficiently executing a preference voyage at the full 
guideline rate.
    MARAD's goal in revising the Rule is to encourage a modern and 
efficient merchant marine while reducing government-wide cargo 
preference costs. A United States General Accounting Office (GAO) 
report entitled CARGO PREFERENCE REQUIREMENTS--Objectives Not 
Significantly Advanced When Used in the U.S. Food Aid Programs, 
published in September 1994, concluded that food aid programs were 
paying higher shipping rates because guideline rate procedures allowed 
less efficient operators to charge higher rates. The report 
hypothesized that using average operating costs for similar sized ships 
instead of an individual ship's operating costs ``should reduce food 
aid transportation costs.'' MARAD believes that changing the Rule to 
use average costs will be effective in encouraging efficient operation. 
In addition, administrative and technical changes made to the rule will 
help reduce time spent on the program by all parties in a period of 
scarce resources.
    Finally, comments were received that relate to how the averaging 
system will affect each individual operator. One operator requested 
that MARAD consider providing operators with hypothetical rates based 
on recent cost information and also allow an additional comment period. 
Another requested that MARAD undertake a thorough effort to educate 
operators on the averaging process and its likely impact on guideline 
rates.
    MARAD does not believe that an additional comment period will 
provide any significant benefit. However, before the final rule becomes 
effective, MARAD will contact each operator with current costs on file 
to explain the cost averaging system and discuss how it might affect 
rates. MARAD will also provide additional instructions and explanations 
in a brochure explaining guideline rate procedures to the general 
shipping community. In addition, MARAD will also provide the average 
category costs to operators and updates on an ongoing basis.

Averaging

    MARAD proposed that the operating costs (including fuel 
consumption, capital costs and vessel speed) used in the construction 
of the guideline rate be averaged for all vessels within specific size 
categories. The averages would be computed twice a year, or more 
frequently, if necessary. The impact of the change to averaging would 
be a reduction in the guideline rate levels calculated for less 
efficient vessels and an increase in the guideline rate levels of the 
more efficient vessels. Although commenters generally supported the 
principle of averaging, it was unclear to one commenter whether capital 
costs would be averaged. Another believed that the rule should specify 
how MARAD will decide which vessels' costs will be averaged and develop 
a method to prevent use of irrelevant cost data. A third opposed 
averaging stating that it would be unpredictable and inefficient, 
penalizing newer vessels, capital improvements and steam-turbine driven 
vessels.
    Under the averaging system, both vessel operating and capital costs 
will be averaged as will fuel consumption rates and vessel speed. Some 
wording changes have been made in the capital cost sections of the 
final rule to clarify that capital costs are averaged. In regard to 
steam-turbine vessels, it is true that any cost that is greater than 
the average creates a disadvantage to the operator of the higher cost 
vessel. MARAD shared the commenter's concern about impact on newer 
vessels that might enter the fleet and has provided a separate new 
vessel allowance. Because capital improvements are generally undertaken 
to create efficiencies in other cost areas, effective capital 
improvements should yield a long-term advantage to the operator.
    Regarding the use of inappropriate data that could cause the 
average to be somehow distorted, MARAD will pay close attention to data 
provided to assure that it yields a meaningful average. Clearly, if a 
vessel carried preference cargo in this program during the prior year, 
it will be included in the average. For other vessels, an operator's 
program participation will be a factor in determining inclusion in the 
average. However, other factors such as the individual vessel's program 
participation and cost structure will also be considered.

Vessel Categories

    MARAD proposed a four-category system based on cargo deadweight

[[Page 3822]]

capacity (CDWT) with the cargo capacity determining which category of 
costs were to be used. Six commenters raised issues concerning 
categories. The comments concerning categories fall into three basic 
areas: Mixing vessel types within a category, how and why the 
categories were selected, and alternative category suggestions.
    Two commenters opposed assigning vessels to categories without 
regard to vessel type. One commenter stated that the cost structure of 
a LASH liner operation bears no resemblance to the cost structure of 
bulk operators. The other commenter argued that tug and barges are 
inappropriate for transoceanic voyages and should therefor not be 
included with vessels which are fully capable.
    It is true that LASH liner operations have cost structures which 
are not comparable to bulk operations. However, from time to time LASH 
vessels have competed for and carried bulk and bagged commodities 
outside of liner operations. To the extent that LASH vessels are used 
outside of liner operations and subject to this rule, MARAD finds no 
reason to exclude this vessel type from the cost discipline that 
averaging by categories provides.
    In regard to the appropriateness of transoceanic tug and barge 
movements, tugs and barges have regularly competed for transoceanic 
cargoes during the last several years. MARAD sees no reason why two 
vessel types competing for the same cargoes should not be subject to 
the same guideline rate methodology.
    With respect to how size categories were selected, MARAD examined 
the sizes and costs of vessels that have carried preference cargo, the 
number of vessels of similar size, and the cargo amounts carried on 
individual voyages in the preference trade.
    MARAD also considered the difference between vessel types (i.e., 
bulk carriers, tankers, tug/barges, and general cargo), and trading 
patterns in arriving at the proposed vessel categories. The analysis 
placed vessels in size categories where they compete primarily with 
each other and have similar aggregate cost structures.
    MARAD's proposal to use cargo capacity rather than vessel size to 
determine which category of costs to use was not generally well 
received. Two commenters argued that the approach was less efficient 
and could result in inequities for cargoes just above and below the 
category break. After reviewing the comments and doing further 
analysis, MARAD has reconsidered this approach and now believes that 
categories based on vessel size would be the most effective and fair to 
all concerned because costs are more closely related to vessel 
deadweight than cargo deadweight.
    One set of comments from industry and one from government proposed 
vessel category sizes different from MARAD's. Both proposed five 
different category sizes and one proposed categories broken down by 
vessel deadweight (DWT) in lieu of CDWT. MARAD's original proposal and 
the two alternatives are:

----------------------------------------------------------------------------------------------------------------
             Category                     MARAD (CDWT)          (CDWT) Alternative #1     (DWT) Alternative #2  
----------------------------------------------------------------------------------------------------------------
I................................  <8,000 CDWT..............  <12,000 CDWT............  <10,000 DWT.            
II...............................  8,000-19,999.............  12,000-24,999...........  10,000-19,999.          
III..............................  20,000-34,999............  25,000-37,999...........  20,000-29,999.          
IV...............................  >35,000..................  38,000-50,000...........  30,000-49,999.          
V................................  None.....................  >50,000.................  =>50,000.               
----------------------------------------------------------------------------------------------------------------

    In response to the proposals, MARAD constructed guideline rates 
using the averaging method with all three different category size 
methods. The analysis showed a more even progression of rates from one 
cargo size to another using the MARAD categories and that there is 
little difference resulting from using CDWT instead of DWT to establish 
the MARAD categories. However, the review resulted in a modest shift in 
the break point between Category I and Category II from 8,000 CDWT to 
10,000 DWT. Also, costs for vessels in the greater than 35,000 DWT 
category did not display major variations due to vessel size. 
Consequently, the final rule will have four categories based on vessel 
size.

Voyage Parameters

    The parameters of the pro forma voyage used in the construction of 
the fair and reasonable guideline rate were addressed by five 
commenters. Three comments were received concerning MARAD's proposal 
for constructing voyages based upon MARAD selecting the most 
appropriate port range for the return leg of the preference voyage, 
rather than a return to the load port in all instances. Although one 
commenter objected to the change without stating a specific reason, two 
generally supported the change, as being in keeping with commercial 
practices. One suggested that the return leg always terminate in the 
U.S. Gulf, as that is where most cargo originates. The other suggested 
that the language in the rule be expanded to include specific reference 
to the practices of the owner and the prospects for subsequent 
employment.
    MARAD believes that the method of voyage construction published in 
the NPRM can adequately address these concerns. Regarding always 
terminating in the U.S. Gulf, in certain circumstances, e.g., 
consecutive voyages from the U.S. West Coast, the U.S. Gulf would not 
be the appropriate termination area. The rule already authorizes MARAD 
to select ``the most appropriate'' port range, so expanding the 
language is not necessary.
    Since speed would be averaged across vessel types, MARAD proposed 
that the separate weather delay factors in Sec. 382.3(e)(6) be 
eliminated. However, one commenter pointed out that tug/barge units 
will still encounter greater weather delays than self propelled ships. 
As a result of comments received, MARAD reconsidered this item and the 
10% delay factor for computing average speed for tugs has been retained 
in the final rule.
    One commenter asserted that a critical problem with the 
transportation of bulk preference cargo is that the risk shifted to 
carriers by the use of ``full berth terms'' and other land-based 
transportation requirements in preference charter parties. In the NPRM, 
MARAD noted the differences in risk between load and discharge terms 
and indicated its intention to use delay factors which reflect the 
inherent risks, therefore no change has been made to the final rule.
    Finally, a government commenter requested that MARAD continue to 
calculate one-way rates at the time of booking for vessels sold or 
scrapped prior to their return to the United States. The final rule 
continues to provide for a one-way rate, but with a more precise 
definition of the circumstances when it applies. The one-way rate will 
continue to be calculated at the same time as the full round-trip 
guideline rate.

[[Page 3823]]

Guideline Rate Adjustments

    MARAD's proposal to eliminate backhaul adjustments elicited 
comments from three operators and two government shippers. The comments 
from the operators strongly favor MARAD's proposal, while the 
government shippers opposed it. MARAD believes the proposal to 
eliminate the backhaul adjustment provides the operator with a greater 
ability to increase its commercial carriage and U.S.-flag participation 
in the U.S. foreign trade. Further, MARAD believes that increased 
commercial carriage could help lower overall program costs, and 
therefore the proposal is unchanged in the final rule.
    As a result of substitutions, voyage variations, add-on cargoes, 
and similar recalculations, MARAD averages two guideline rate 
calculations for each cargo actually fixed. MARAD intends to 
substantially reduce these recalculations and generally determine only 
one guideline rate for each preference cargo. The guideline rate based 
on the initially requested vessel and cargo will also be applicable to 
all other vessels in the same tonnage category that might actually 
carry the cargo and for cargo amounts plus or minus five percent of the 
original request. An exception would be made when a vessel eligible to 
receive the ``new vessel allowance'' is substituted for an older 
vessel, or vice versa.
    Two government commenters and one operator also raised the issue of 
whether rates would be recalculated when an outbound commercial cargo 
is added on to a preference cargo. The government commenters argued 
that additional revenue sources should always trigger a recalculation. 
The other commenter noted that add-on commercial cargo is similar to 
the backhaul adjustment and its elimination from the guideline process 
would provide an incentive to bid on commercial cargo. MARAD will 
recalculate rates, if requested, for any add-on cargo which increases 
cargo size by more than five percent.

Cargo Size (Seventy Percent Limitation)

    Three commenters provided views regarding MARAD's proposal to 
eliminate the seventy percent limitation in the current rule. This 
provision currently provides that, for the purposes of calculating 
guideline rates, calculated cargo tonnage shall not be less than 70 
percent of the vessel's cargo capacity. All commenters agreed with 
MARAD's proposal noting that the seventy percent rule has limited 
competition. Therefore, Sec. 382.3(f) of the final rule will provide 
that the determination of cargo tonnage in the guideline rate shall be 
based on the actual cargo tonnage booked or considered for booking on 
the voyage.

Capital Costs

    Five changes designed to simplify or clarify rate calculations were 
proposed within this cost category. Comments pertaining to these 
changes and other issues related to capital cost were received from six 
of the eight commenters.
    The first change adds a clarifying cross reference in 
Sec. 382.3(b)(2)(ii). In the final rule the paragraph explicitly 
references paragraph (b)(2)(i) for the periods of depreciation to be 
used in determining interest expense in the guideline rate.
    Three commenters expressed views on MARAD's second proposal, 
elimination of the 2.5 percent residual value in the calculation of 
depreciation. Although two commenters supported elimination, the third 
had a conceptional problem with the elimination of residual value in 
the depreciation calculation. Because MARAD believes that eliminating 
residual value simplifies the guideline rate process while conforming 
to industry practice, residual value is eliminated from the 
depreciation calculation in Sec. 382.3(b)(2)(i) of the final rule.
    The third proposed change to the capital cost calculation concerns 
situations where interest rates are not available for certain 
capitalized items. MARAD proposed the ten-year Treasury-bill (T-bill) 
rate plus one percent as an appropriate and readily available 
substitute. One commenter supported the change while a second contended 
that a change would probably result in a reduction for some operators. 
This concern is unfounded; the rate will not be substituted when the 
operator provides an interest rate. Accordingly, Sec. 382.3(b)(2)(ii) 
is amended in the final rule to specify the ten-year T-bill rate plus 
one percent as the rate used in the fair and reasonable rate 
calculation when no interest rate is available or for vessels without 
mortgage debt.
    The fourth proposed change, which was supported by the commenters 
who voiced a view, related to the interest rate used to calculate 
capital costs when an owner has a variable interest rate. In the final 
rule Sec. 382.3(b)(2)(ii) has been amended to specify January 1 and 
July 1 as the dates on which the interest rates in effect would be used 
for the calculation of fair and reasonable rates.
    The final proposed change to capital costs was the addition of a 
statement in the new Sec. 382.3(b)(3) noting that the return on working 
capital is a voyage related capital cost element and thus not part of 
the averaged costs. This proposed change elicited comments from two 
persons. One agreed with the change. The second commenter appeared to 
misunderstand the proposal. The final rule includes the proposed change 
in new Sec. 382.3(b)(3).
    The rate of return used in the calculation of capital costs also 
elicited extensive responses from four commenters, even though no 
change was proposed. A government commenter objected to the ``policy of 
guaranteeing'' a return on investment, suggesting that if the 
``guarantee'' cannot be eliminated, it be based on a rate of return for 
maritime companies only. The first part of this comment misinterprets 
the function of the fair and reasonable guideline rates in the 
preference market. Guideline rates provide a ceiling on market rates 
charged for the carriage of preference cargoes on U.S.-flag vessels. 
Far from ``guaranteeing'' a rate of return, a guideline rate limits the 
shipowner's profitability. In addition, the Comptroller's opinion 
specifically states that a reasonable profit should be included in the 
rate. Regarding the suggestion to base the rate of return on maritime 
companies only, MARAD believes that a maritime profitability index 
would be too narrow to assure a reasonable return during all periods.
    In general, the three operator commenters expressed the opposite 
point of view from the above. They generally expressed the belief that 
a higher rate of return is necessary to compensate for a high risk 
investment in ocean shipping. One commenter suggested that the rate of 
return for working capital should be based on short term business loan 
rates such as prime plus a spread.
    Although these comments have an element of truth, they also 
illustrate the dilemma of choosing an appropriate rate of return. MARAD 
believes that the suggestion to use a short term loan rate for the 
return on working capital is a reasonable suggestion. However, short-
term loan rates are volatile and the suggestion ignores the question of 
a specific spread to use. In the end, the Agency believes the current 
procedures have worked well in the past and should continue to do so in 
the future. The final rule stipulates a rate of return on working 
capital and equity based on the five-year average of return on 
stockholders' equity for a cross section of transportation companies.

[[Page 3824]]

New Vessel Allowance

    One goal of revising Part 382 has been to encourage newer and more 
efficient vessels to enter the cargo preference market. To this end, 
MARAD proposed including an allowance for acquisition capital in the 
guideline rates for both newly constructed vessels and vessels acquired 
prior to the fifth anniversary of their construction. The proposal 
provided that the allowance be included for a period of five years 
after acquisition by the owner. Comments were received from four 
persons on this provision. Commenters believed that the provision was 
insufficient and that a strong market would be necessary for the 
operator to benefit from the allowance. One commenter asserted that the 
allowance would only be received if MARAD paid it directly, while 
another supported the concept but only for newly constructed vessels. 
As a result of the comments, MARAD modified the new vessel allowance to 
provide a longer allowance period for newer vessel owners. In the final 
rule, the annual new vessel allowance will equal ten percent of the 
vessel's capitalized costs during the first year following construction 
or acquisition, and will decline by one percentage point each of the 
subsequent years until the vessel is ten years old. No allowance will 
be included for vessels more than ten years of age.

Information Collection Requirements

    MARAD proposed reducing reporting and auditing requirements while 
continuing to recognize the agency's need for accurate cost and 
financial information. Two favorable comments were received on MARAD's 
proposals to reduce the amount and frequency of data reporting. To 
implement these two concepts, the final rule amends Sec. 382.2(b)(8) to 
authorize aggregate schedule filings, and Sec. 382.2(c) to change post-
voyage filing to a semiannual requirement.
    Two changes in reporting requirements were proposed to reduce the 
audit burden on operators, the Department of Transportation's Office of 
the Inspector General (OIG), and MARAD. The first change, intended to 
alleviate the need for auditing by the OIG, allowed an operator to have 
its submissions certified by an independent certified public accountant 
(CPA). One operator and the AICPA pointed out a problem with the 
specific phrase used by MARAD. The AICPA recommended replacement 
language specifying a report based on the independent CPA's performing 
an engagement consistent with professional standards, i.e., an 
attestation engagement. In addition, there was strong sentiment from 
three commenters for MARAD retaining the right to audit. It was never 
MARAD's intent to relinquish the right to request audits, but to 
alleviate some of the need for audit. However, it is MARAD's intention 
in deciding which operator's data to audit in any given year to factor 
the level of CPA review into its considerations. In consideration of 
the comments, the wording in Sec. 382.2 of the final rule has been 
changed to include the language suggested by the AICPA.
    The second proposed change in reporting requirements was to require 
the operator to use the accounting treatment it already uses for its 
own records and audited financial statements for its cost submissions 
to MARAD. One commenter believed that drydocking accruals should still 
be allowed even if a company expenses its drydocking costs. Another 
remarked that reporting consistency is critical when using averaging 
and MARAD should review the reported data and provide guidance to 
ensure consistent cost data. While it would be advantageous if all 
operators reported in the same manner and all operators accrued for 
drydocking costs, the Agency believes that the averaging process itself 
will even out the drydocking costs in much the same way as the accrual 
process.
    MARAD also proposed three minor reporting changes. First, reporting 
the Official Coast Guard Identification Number (official number) would 
be required; second, the DWT requirement would be amended to require 
only summer DWT in metric tons and eliminate the requirement for Suez 
and Panama Canal net register tons; and, finally, the definition of 
``operating day'' would be clarified. Only positive comments were 
received on these proposed changes and the proposals are included in 
the final rule.

Brokerage and Overhead

    Part 382.3(b)(5)(d) specifies that ``allowance for broker's 
commission and overhead of 8.5 percent shall be added to the sum of the 
operating cost component, the capital cost component, and the port and 
cargo handling cost component.'' Two comments were received on this 
component of the rate. The first questioned whether 8.5% is an 
appropriate allowance. The second was whether brokerage and overhead 
could be allowed on pass through items. MARAD believes that the 6% 
allowance for overhead costs that is added to the 2.5% brokerage 
included in guideline rates is still appropriate. Regarding brokerage 
and overhead on pass through items, fair and reasonable guideline rates 
are for ocean transportation only and an allowance in the guideline 
rate for inland transportation items is outside the scope of this 
rulemaking.

Total Revenue Rates

    When more than one cargo has been booked on a vessel subject to the 
guideline rate regulations or when there are multiple load and/or 
discharge ports, calculating individual rates for particular parcels 
and/or destinations, as currently required by Sec. 382.3(f) and (g), is 
impossible. Accordingly, MARAD proposed calculating a ``Total Revenue 
Rate'' when this occurs. The guideline rate would be calculated 
normally, but the final rate would be expressed as gross revenue for 
the total voyage, rather than as a rate per ton. If the revenue from 
the sum of the individual parcels does not exceed the total revenue 
calculated in the guideline, the individual rates would be considered 
fair and reasonable.
    A shipper agency expressed concern that total revenue rates could 
result in inequities to recipients or shipper agencies if a high 
fixture and a low fixture combine to result in an acceptable total 
revenue. One operator expressed the belief that using a total revenue 
rate for combined parcels penalizes the operator for initiative in 
combining parcels and another asked that the calculation method be 
specified and shown by example. Responses to these concerns are drawn 
from experience with the total revenue concept, which has been used 
under waiver authority.
    Experience to date has not shown operators frequently blending a 
high fixture rate with a low one. Typically, combining cargoes allows 
an operator to spread fixed costs more widely and bid a highly 
competitive rate for each cargo. Using the total revenue approach 
allows MARAD to combine the fixed costs for the whole voyage with the 
variable costs for the individual parcels. But because the voyage's 
fixed costs and the parcels' variable costs are not derived from the 
same tonnage, a rate per ton is not meaningful.
    MARAD does not believe that total revenue rates penalize operators 
for combining cargoes. Total revenue rates actually reflect the 
practices of the operators when they combine cargoes. Using a total 
revenue approach simply requires comparing all the costs for all 
parcels to be carried on the voyage to the total revenue proposed in 
the operator's bids, thereby obviating the need to artificially 
allocate fixed costs to one cargo or the other.
    As requested, an example of a total revenue rate follows:

[[Page 3825]]



                                                      Cargo                                                     
----------------------------------------------------------------------------------------------------------------
                        Amount                                                                                  
       Cargo         metric tons          Type                Terms             Load port        Discharge port 
----------------------------------------------------------------------------------------------------------------
Rice...............       10,000  Bagged.............  FBT...............  Galveston, TX.....  Durban, South    
                                                                                                Africa.         
Wheat..............       10,000  Bulk...............  VLFO (4000/1000)    New Orleans, LA...  Beira,           
                                                        SHEX.                                   Mozambique.     
Corn...............       10,000  Bulk...............  FBT...............  New Orleans, LA...  Mombassa, Kenya. 
----------------------------------------------------------------------------------------------------------------


                                                     Voyage                                                     
----------------------------------------------------------------------------------------------------------------
             Port                  Activity       Port time     Distance     Sea time    Port costs  Cargo costs
----------------------------------------------------------------------------------------------------------------
New Orleans, LA..............  Load wheat and           8.38  ...........  ...........      $35,000      $25,000
                                corn.                                                                           
                               Bunker..........         1.00  ...........  ...........  ...........  ...........
Galveston, TX................  Load rice.......         8.49          390         1.25       35,000      180,000
Durban, South Africa.........  Discharge rice..        10.18         8234        28.32       25,000      100,000
Beira, Mozambique............  Discharge wheat.        12.73          702         2.24       25,000            0
Mombassa, Kenya..............  Discharge corn..         8.49         1149         3.67       25,000       60,000
                               Bunker..........         1.00  ...........         0.00  ...........  ...........
U.S. Gulf....................  Return..........         0.00         9986        31.92            0            0
                                                ----------------------------------------------------------------
      Total Days.............  ................        48.25  ...........        85.40      145,000      385,000
----------------------------------------------------------------------------------------------------------------


                  Fair and Reasonable Rate Calculation                  
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Fuel Costs...........................................           $415,000
Vessel Operating Costs...............................         $1,500,000
Port Costs...........................................           $145,000
Cargo Costs..........................................           $365,000
Other Cargo Costs....................................            $20,000
Capital Costs........................................           $740,000
Brokerage & Overhead.................................           $270,725
                                                      ------------------
      Total..........................................     $3,455,725,000
                                                      ------------------
      Total Revenue Rate.............................         $3,455,725
                                                      ==================
      Average Rate per ton...........................            $115.19
------------------------------------------------------------------------


                                 Fixture and Fair and Reasonable Rate Comparison                                
----------------------------------------------------------------------------------------------------------------
                                                                                                     Fair and   
                      Cargo                          Rate bid         Amount          Revenue       reasonable  
                                                                                                       rate     
----------------------------------------------------------------------------------------------------------------
Rice............................................         $125.00          10,000      $1,250,000                
Wheat...........................................           90.00          10,000         900,000                
Corn............................................           95.00          10,000         950,000                
                                                 ------------------------------------------------               
      Total.....................................  ..............          30,000       3,100,000  \1\ $3,455,725
      Average...................................         103.33                                                 
----------------------------------------------------------------------------------------------------------------
\1\ Since voyage revenue is less than total revenue from the fair and reasonable rate, the individual bids are  
  considered fair and reasonable.                                                                               

    The preceding example details the areas where costs vary and 
overlap. In order to provide individual rates, both direct and overall 
voyage costs must be allocated to each cargo. This is very difficult to 
accomplish fairly. Also, as this example illustrates, individual 
fixture rates can be higher or lower than the average rate, and yet the 
operator's total effort yields revenue that is fair and reasonable. The 
only unique aspect of the total revenue rate is the elimination of the 
step which divides the total allowable costs by the cargo tons to 
derive a rate per ton.
    MARAD believes that the total revenue approach represents the best 
method for protecting the interests of all parties when cargoes are 
combined. Furthermore, combining cargoes has become increasingly common 
in the past two years. Consequently, in the final rule, Sec. 382.3 (f) 
and (g) will allow the use of either a cost per ton or other measure 
that MARAD determines appropriate.

Revised Rate Methodology

    The guideline or fair and reasonable rate established by MARAD, 
which applies only to the ocean borne portion of cargo transportation, 
consists of four components: (1) Operating costs; (2) capital costs; 
(3) port and cargo handling costs; and (4) brokerage and overhead. The 
operating cost component of the fair and reasonable rate will reflect 
average vessel operating costs for vessels within the specified size 
categories based on the historical data submitted in accordance with 
Sec. 382.2 of this rule. MARAD will update the operating costs to the 
current period, utilizing escalation factors for wage and non-wage 
costs. The averages for each category of vessels will be calculated at 
least twice per year. To the extent vessels are time chartered or 
leased,

[[Page 3826]]

operators will submit both operating and capital costs, including all 
capitalized costs and interest rates for vessels subject to capital 
leases.
    Vessel costs will be placed in categories based on the vessel's 
summer deadweight tons (DWT). The categories will be as follows:

Category I--Less than 10,000 DWT
Category II--10,000--19,999 DWT
Category III--20,000--34,999 DWT
Category IV--Greater than 35,000 DWT

    All eligible annual operating costs for vessels within a category 
will be added together and divided by the total number of operating 
days for those vessels to yield a daily operating cost. The cost will 
be indexed to the current year and multiplied by estimated total voyage 
days to yield the operating cost segment for the voyage.
    Fuel consumption will be determined on the basis of actual reported 
fuel consumption at sea and in port for vessels within the same 
category. The average fuel consumptions of vessels in the category will 
be multiplied by the projected number of voyage days at sea and in port 
to yield total fuel consumed. MARAD will obtain current spot market 
fuel prices from published sources at bunkering ports, consistent with 
sound commercial practice, and apply them to fuel consumed to produce 
the fuel segment of the operating cost component. The total of the fuel 
and non-fuel operating cost segments will be added together to yield 
the operating cost component for the voyage.
    The capital cost component will be an average based on vessels in 
the applicable size category. It will consist of an allowance for 
depreciation and interest and a reasonable return on investment. 
Depreciation for vessels in a category will be straight-line based on a 
20-year economic life. However, if the owner acquired an existing 
vessel, the vessel will be depreciated on a straight-line basis over 
the remaining period of its 20-year economic life, but not fewer than 
10 years. Capitalized improvements will be depreciated straight-line 
over the remainder of the 20-year period, but not fewer than 10 years, 
commencing with the capitalization date for those improvements.
    For the purpose of calculating interest expense, MARAD will assume 
that original vessel indebtedness is 75 percent of the owner's 
capitalized vessel costs and that principal payments are made in equal 
annual installments over the economic life of the vessel. To compute 
the interest cost, the owner's actual interest rates will be applied to 
the vessel's outstanding constructed debt, using the depreciation 
schedule in Sec. 382.3(b)(2)(ii). Where the owner has a variable 
interest rate, the owner's rate prevailing when the average capital 
cost component is calculated will be used. In cases where there is no 
interest rate available, and for operators without vessel debt, MARAD 
will use the ten-year T-bill rate plus one percent.
    Return on investment will have two components, return on equity and 
return on working capital. The rate of return will be based upon a 
five-year average of the most recent rates of return for a cross 
section of transportation industry companies, including maritime 
companies. Equity used will be the vessels' constructed net book values 
less constructed principal amounts. Working capital will be voyage 
based and be the dollar amount necessary to cover operating and voyage 
expenses.
    A new vessel allowance will be included in the capital component of 
newly built vessels and vessels acquired when five years of age or 
less. This allowance, which will be paid until the vessel is ten years 
old, will equal ten percent of the vessel's capitalized costs during 
the first year following construction or acquisition, and will decline 
by one percentage point each of the subsequent years. The voyage 
allowance will be the annual amount divided by 300 operating days and 
multiplied by estimated voyage days.
    The average annual depreciation, interest, and return on equity for 
vessels in the category will be divided by 300 operating days to 
determine a daily amount. The total of these elements will be 
multiplied by estimated voyage days and added to the return on working 
capital and the new vessel allowance to determine the capital cost 
component used in the fair and reasonable rate calculation.
    The port and cargo handling cost component will be determined for 
each voyage on the basis of vessels in the category and the actual 
cargo tender terms for the commodity, load and discharge ports, and lot 
size. The costs will include applicable fees for wharfage and dockage 
of the vessel, canal tolls, cargo loading and discharging, and all 
other voyage costs associated with the transportation of preference 
cargo. Costs used to determine the port and cargo cost component will 
be based on the most current data from all available sources and 
verified from data received on completed cargo preference or commercial 
voyages.
    To determine the brokerage and overhead component of the fair and 
reasonable rate, MARAD will add the cost components for operating, 
capital, and port and cargo handling and multiply that sum by an 8.5 
percent allowance for broker's commissions and overhead. The total of 
these four components, expressed as total revenue or as a rate per ton, 
whichever is most applicable, will be the fair and reasonable rate.
    If a vessel is scrapped or sold after discharging a preference 
cargo, and the vessel does not return to the United States as a U.S.-
flag vessel, the guideline rate will be adjusted to reflect the 
termination of the voyage after cargo discharge. If the rate received 
by the operator for the preference cargo exceeds the adjusted guideline 
rate for the one-way voyage, the operator may be required to repay the 
difference in ocean freight to the shipper agency.
    In special circumstances, certain procedures prescribed in this 
rule may be waived, provided the procedures adopted are consistent with 
the Act and with the intent of these regulations.

Rulemaking Analysis and Notices

Executive Order 12866 (Regulatory Planning and Review); DOT Regulatory 
Policies and Procedures; Pub. L. 104-121

    This rulemaking is not considered an economically significant 
regulatory action under section 3(f) of E.O. 12866. It is not 
considered to be a major rule for purposes of Congressional review 
under Pub. L. 104-121. It is anticipated that savings to the Government 
of less than $1 million per year will result. Accordingly, the program 
will not have an annual effect on the economy of $100 million or more. 
While this rule does not involve any change in important Departmental 
policies, it is considered significant under DOT Regulatory Policies 
and Procedures and E.O. 12866 because it addresses a matter of 
considerable importance to the maritime industry and may be expected to 
generate significant public interest. Accordingly, the Office of 
Management and Budget has reviewed this rule.
    When the NPRM was published, MARAD estimated the potential savings 
to the Government from this rulemaking by recalculating 167 rates for 
the years 1992 through 1995 using the revised methodology. This sample 
reflected the operators and countries in the complete data base. 
Extrapolating from the sample showed that averaging could have saved 
three million dollars in ocean freight for preference cargoes during 
the period. The comments received on the NPRM expressed concern that 
this analysis was flawed because it contained vessels which have since 
been either scrapped or withdrawn from the preference trade.

[[Page 3827]]

In response, MARAD recomputed the average costs for 1993 and 1994 using 
only vessels that are currently available for the preference trade. 
Table I shows the costs derived for each category from the reduced 
sample which were then used to calculate guideline rates using the 
averaging method. Table II summarizes the results of these calculations 
and shows the percentage savings that would have been realized using 
averaging.

                                       Table I.--Daily Costs Used in Guideline Rate Averages for CY 1993 and 1994                                       
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Operating     Capital      Fuel (at       Fuel        Speed                
                Categories                               Year                  costs        costs        sea)*      (import)*     (knots)    Sample size
--------------------------------------------------------------------------------------------------------------------------------------------------------
Category I................................  1993..........................       $4,087       $1,224       $1,600         $222         6.25            8
(<10,000 vdwt)............................  1994..........................        3,321        1,294        1,600          195         6.25            8
Category II...............................  1993..........................        6,077        3,337        3,468          275         8.25           15
(10-19,999 vdwt)..........................  1994..........................        6,207        3,543        3,137          260         8.37           15
Category III..............................  1993..........................       11,447        5,435        3,270          443        12.66            4
(20-35,000 vdwt)..........................  1994..........................       10,686        4,604        4,366          674        13.79            6
Category IV...............................  1993..........................       11,943        6,355        4,963          526        13.54           13
(>35,000 vdwt)............................  1994..........................       12,757        6,138        4,492          680        13.36           14
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Extrapolating the estimated 1.05% savings based on actual fixtures 
during 1993 and 1994 to the period 1993 to August 1997, yields a 
savings of nearly one million dollars as a result of averaging. This 
savings estimate is approximately one-third the savings estimated with 
the ship mix used in the initial analysis. The reason for this is that 
declining levels of cargoes since 1994 have forced operators to bid 
very low rates to obtain cargoes, thus forcing many inefficient vessels 
out of the trade. Nevertheless, a million dollar savings is 
significant.

               Table II.--Savings in Sample Rates From Using Averaging System for Rate Calculation              
----------------------------------------------------------------------------------------------------------------
                                                      Fixture        Averaging     Averaging vs                 
                                     Sample size      revenue         savings        guideline      Metric tons 
----------------------------------------------------------------------------------------------------------------
Category I.........................           18       6,098,662       ($96,481)      ($692,251)          91,956
Category II........................           22      20,953,285               0    ($1,017,582)         296,068
Category III.......................           10      20,155,736      ($611,594)      ($835,651)         224,247
Category IV........................           26      59,655,091      ($416,255)      ($429,445)       1,003,997
                                    ----------------------------------------------------------------------------
      Sample total.................           76     106,862,774    ($1,124,330)    ($2,974,929)       1,616,268
                                    ============================================================================
                                     ...........  ..............          -1.05%          -2.32%  ..............
----------------------------------------------------------------------------------------------------------------

Federalism

    The Maritime Administration has analyzed this rulemaking in 
accordance with the principles and criteria contained in Executive 
Order 12612 and has determined that it would not have sufficient 
federalism implications to warrant the preparation of a Federalism 
Assessment.

Regulatory Flexibility Act

    The Maritime Administration certifies that this regulation would 
not have a significant economic impact on a substantial number of small 
entities. There are approximately twenty-five vessel operators that 
participate in this program, none of which are small entities.

Environmental Assessment

    This final rule has no environmental impact and an environmental 
impact statement is not required under the National Environmental 
Policy Act of 1969.

Paperwork Reduction Act

    This rulemaking reduces the current requirement for the collection 
of information. The Office of Management and Budget (OMB) has reviewed 
and approved the information collection and record keeping requirements 
(approval number 2133-0514) in the current rule under the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.). Public comments were 
requested in the NPRM at 62 FR 9150, published February 28, 1997. 
Closing date for comments was April 29, 1997. No comments were received 
regarding this information collection. A subsequent 30-day notice was 
published July 21, 1997 by the Office of the Secretary of 
Transportation at 62 FR 39046. Comments were due on or before August 
20, 1997. No comments were received as a result of this notice.
    In accordance with the Paperwork Reduction Act of 1995, MARAD 
received an extension from OMB of approval for three years for this 
information collection.

Unfunded Mandates

    Under the Unfunded Mandate Reform Act (Pub.L. 104-4) the Maritime 
Administration must consider whether this rule will result in an annual 
expenditure by State, local and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more (adjusted annually 
for inflation). The Act also requires that the Maritime Administration 
identify and consider a reasonable number of regulatory alternatives 
and, from those alternatives, select the least costly, most cost-
effective, or least burdensome alternative that will achieve the 
objectives of the rule. As stated above, by this rule the Maritime 
Administration is reducing regulatory burden, i.e., collection of 
information, on the public. This final rule does not result in an 
annual expenditure by State, local and tribal governments, in the 
aggregate, or by the private sector, of $100 million or more and is the 
least burdensome alternative that will achieve the objective of the 
rule.

List of Subjects in 46 CFR Part 382

    Agricultural commodities, Government procurement, Loan programs--
foreign relations, Maritime carriers, Reporting and record keeping 
requirements.

[[Page 3828]]

    Accordingly, 46 CFR Chapter II is hereby amended by revising part 
382, to read as follows:

PART 382--DETERMINATION OF FAIR AND REASONABLE RATES FOR THE 
CARRIAGE OF BULK AND PACKAGED PREFERENCE CARGOES ON U.S.-FLAG 
COMMERCIAL VESSELS.

Sec.
382.1  Scope.
382.2  Data submission.
382.3  Determination of fair and reasonable rates.
382.4  Waivers.

    Authority: 46 App. U.S.C. 1114, 1241(b); 49 CFR 1.66.


Sec. 382.1  Scope.

    The regulations in this part prescribe the type of information that 
shall be submitted to the Maritime Administration (MARAD) by operators 
interested in carrying bulk and packaged preference cargoes, and the 
method for calculating fair and reasonable rates for the carriage of 
dry (including packaged) and liquid bulk preference cargoes on U.S.-
flag commercial vessels, except vessels engaged in liner trades, which 
is defined as service provided on an advertised schedule, giving 
relatively frequent sailings between specific U.S. ports or ranges and 
designated foreign ports or ranges.


Sec. 382.2  Data submission.

    (a) General. The operators shall submit information, described in 
paragraphs (b) and (c) of this section, to the Director, Office of 
Costs and Rates, Maritime Administration, Washington, D.C. 20590. To 
the extent a vessel is time chartered, the operator shall also submit 
operating expenses for that vessel. All submissions shall be certified 
by the operators. A further review based on the independent CPA 
performing an engagement consistent with professional standards, i.e., 
an attestation engagement, is recommended. Submissions are subject to 
verification, at MARAD's discretion, by the Office of the Inspector 
General, Department of Transportation. MARAD's calculations of the fair 
and reasonable rates for U.S.-flag vessels shall be performed on the 
basis of cost data provided by the U.S.-flag vessel operator, as 
specified herein. If a vessel operator fails to submit the required 
cost data, MARAD will not construct the guideline rate for the affected 
vessel, which may result in such vessel not being approved by the 
sponsoring Federal agency.
    (b) Required vessel information. The following information shall be 
submitted not later than April 30, 1998, for calendar year 1997 and 
shall be updated not later than April 30 for each subsequent calendar 
year. In instances where a vessel has not previously participated in 
the carriage of cargoes described in Sec. 382.1, the information shall 
be submitted not later than the same date as the offer for carriage of 
such cargoes is submitted to the sponsoring Federal agency, and/or its 
program participant, and/or its agent and/or program's agent, or 
freight forwarder.
    (1) Vessel name and official number.
    (2) Vessel DWT (summer) in metric tons.
    (3) Date built, rebuilt and/or purchased.
    (4) Normal operating speed.
    (5) Daily fuel consumption at normal operating speed, in metric 
tons (U.S. gallons for tugs) and by type of fuel.
    (6) Daily fuel consumption in port while pumping and standing, in 
metric tons (U.S. gallons for tugs) and by type of fuel.
    (7) Total capitalized vessel costs (list and date capitalized 
improvements separately), and applicable interest rates for 
indebtedness (where capital leases are involved, the operator shall 
report the imputed capitalized cost and imputed interest rate).
    (8) Operating cost information, to be submitted in the format 
stipulated in 46 CFR 232.1, on Form MA-172, Schedule 310. Operators are 
encouraged to provide operating cost information for similar vessels 
that the operator considers substitutable within a category, as defined 
in Sec. 382.3(a)(1), in the aggregate on a single schedule. Information 
shall be applicable to the most recently completed calendar year.
    (9) Number of vessel operating days pertaining to data reported in 
paragraph (b)(8) of this section for the year ending December 31. For 
purposes of this part, an operating day means any day on which a vessel 
or tug/barge unit is in a seaworthy condition, fully manned, and either 
in operation or standing ready to begin pending operations.
    (c) Required port and cargo handling information. The port and 
cargo handling costs listed in this paragraph shall be provided 
semiannually for each cargo preference voyage terminated during the 
period. The report shall identify the vessel, cargo and tonnage, and 
round-trip voyage itinerary including dates of arrival and departure at 
port or ports of loading and discharge. The semiannual periods and the 
information to be submitted are as follows:

------------------------------------------------------------------------
                  Period                              Due date          
------------------------------------------------------------------------
April 1-September 30......................  January 1.                  
October 1-March 31........................  July 1.                     
------------------------------------------------------------------------

    (1) Port expenses. Total expenses or fees, by port, for pilots, 
tugs, line handlers, wharfage, port charges, fresh water, lighthouse 
dues, quarantine service, customs charges, shifting expenses, and any 
other appropriate port expense.
    (2) Cargo expense. Separately list expenses or fees for stevedores, 
elevators, equipment, and any other appropriate expenses.
    (3) Extra cargo expenses. Separately list expenses or fees for 
vacuvators and/or cranes, lightering (indicate tons moved and cost per 
ton), grain-to-grain cleaning of holds or tanks, and any other 
appropriate expenses.
    (4) Canal expenses. Total expenses or fees for agents, tolls (light 
or loaded), tugs, pilots, lock tenders and boats, and any other 
appropriate expenses. Indicate waiting time and time of passage.
    (d) Other requirements. Unless otherwise provided, operators shall 
use generally accepted accounting principles and MARAD's regulations at 
46 CFR part 232, Uniform Financial Reporting Requirements, for guidance 
in submitting cost data. Notwithstanding the general provisions in 46 
CFR 232.2(c) for MARAD program participants, each operator shall submit 
cost data in the format that conforms with the accounting practices 
reflected in the operator's trial balance and, if audited statements 
are prepared, the audited financial statements. Data requirements 
stipulated in paragraph (b) of this section that are not included under 
those reporting instructions shall be submitted in a similar format. If 
the operator has already submitted to MARAD, for other purposes, any 
data required under paragraph (b) of this section, its submission need 
not be duplicated to satisfy the requirements of this part.
    (e) Presumption of confidentiality. MARAD will initially presume 
that the material submitted in accordance with the requirements of this 
part is privileged or confidential within the meaning of the Freedom of 
Information Act (FOIA), 5 U.S.C. 552(b)(4). In the event of a 
subsequent request for any portion of that data under the FOIA, MARAD 
will inform the submitter of such request and allow the submitter the 
opportunity to comment. The submitter shall claim or reiterate its 
claim of confidentiality at that time by memorandum or letter, stating 
the basis for such assertions of exemption from disclosure. The Freedom 
of Information

[[Page 3829]]

Act Officer, or the Chief Counsel of MARAD, will inform the submitter 
of the intention to disclose any information claimed to be 
confidential, after the initial FOIA request, or after any appeal of 
MARAD's initial decision, respectively.

(Approved by the Office of Management and Budget under control 
number 2133-0514)


Sec. 382.3  Determination of fair and reasonable rate.

    Fair and reasonable rates for the carriage of preference cargoes on 
U.S.-flag commercial vessels shall be determined as follows:
    (a) Operating cost component--(1) General. An operating cost 
component for each category, based on average operating costs of 
participating vessels within a vessel size category, shall be 
determined, at least twice yearly, on the basis of operating cost data 
for the calendar year immediately preceding the current year that has 
been submitted in accordance with Sec. 382.2. The operating cost 
component shall include all operating cost categories, as specified in 
46 CFR 232.5, Form MA-172, Schedule 310, Operating Expenses. For 
purposes of these regulations, charter hire expenses are not considered 
operating costs. MARAD shall index such data yearly to the current 
period, utilizing the escalation factors for wage and non-wage costs 
used in escalating operating subsidy costs for the same period.
    (2) Fuel. Fuel costs within each category shall be determined based 
on the average actual fuel consumptions, at sea and in port, and 
current fuel prices in effect at the time of the preference cargo 
voyage(s).
    (3) Vessel categories.  Vessels shall be placed in categories by 
deadweight capacities (DWT), as follows:

Group I--under 10,000 DWT
Group II--10,000--19,999 DWT
Group III--20,000--34,999 DWT
Group IV--35,000 DWT and over.

    (b) Capital Component--(1) General. An average capital cost 
component for each category shall be constructed, at least twice 
yearly, consisting of vessel depreciation, interest, and return on 
equity.
    (2) Items included. The capital cost component shall include:
    (i) Depreciation. The owners' capitalized vessel costs, including 
capitalized improvements, shall be depreciated on a straight-line basis 
over a 20-year economic life, except vessels purchased or reconstructed 
when their age was greater than 10 years old. To the extent vessels are 
chartered or leased, the operator shall submit the capitalized cost of 
the vessel owner and imputed interest rate. If these items are not 
furnished, MARAD will construct these amounts. When vessels more than 
10 years old are acquired, a depreciation period of 10 years shall be 
used. Capitalized improvements made to vessels more than 10 years old 
shall be depreciated over a 10-year period. When vessels more than 10 
years old are reconstructed, MARAD will determine the depreciation 
period.
    (ii) Interest. The cost of debt shall be determined by applying 
each vessel owner's actual interest rates to the outstanding vessel 
indebtedness. MARAD shall assume that original vessel indebtedness is 
75 percent of the owners' capitalized vessel costs, including 
capitalized improvements, and that annual principal payments are made 
in equal installments over the economic life of the vessels as 
determined in accordance with paragraph (b)(2)(i) of this section. 
Where an operator uses a variable interest rate, the operator's actual 
interest rate at the time of calculation of the average capital cost 
component shall be used. The ten-year Treasury bill (T-bill) rate plus 
one percent on the first business day of the year or the first business 
day on or after July 1 shall be used for operators without vessel debt 
and when the actual rate is unavailable.
    (iii) Return on equity. The rate of return on equity shall be 
computed in the same manner as described in paragraph (b)(3) of this 
section. For the purpose of determining equity, it shall be assumed 
that the vessel's constructed net book value, less outstanding 
constructed principal, is equity. The constructed net book values shall 
equal the owners' capitalized cost minus accumulated straight-line 
depreciation.
    (3) Return on working capital. For each voyage a return on working 
capital shall be included as a voyage related capital cost element, and 
thus not part of the averaged costs. Working capital shall equal the 
dollar amount necessary to cover 100 percent of the averaged operating 
costs and estimated voyage costs for the voyage. The rate of return 
shall be based on an average of the most recent return of stockholders' 
equity for a cross section of transportation companies, including 
maritime companies.
    (4) New vessel allowance. Newly constructed vessels and vessels 
acquired during or before their fifth year of age will receive an 
additional allowance for acquisition capital as part of the capital 
cost element. For the first year following construction or acquisition 
by the operator, a daily amount equal to ten percent of capitalized 
acquisition costs, divided by 300 operating days, shall be included. 
This amount shall be reduced by one percent of capitalized acquisition 
costs each subsequent year. No allowance shall be included after the 
tenth year following construction.
    (5) Voyage component. The annual average depreciation, interest, 
and return on equity for vessels in each category shall be divided by 
300 vessel operating days to yield the daily cost factors. Total voyage 
days shall be applied to the daily cost factors and totaled with the 
return on working capital and new vessel allowance for the voyage to 
determine the daily capital cost component.
    (c) Port and cargo handling cost component. MARAD shall calculate 
an estimate of all port and cargo handling costs on the basis of the 
reported cargo tender terms. The port and cargo handling cost component 
shall be based on vessels in the category and the most current 
information available verified by information submitted in accordance 
with Sec. 382.2(c), or as otherwise determined by MARAD, such as by 
analysis of independent data obtained from chartering agencies.
    (d) Brokerage and overhead component. An allowance for broker's 
commission and overhead expenses of 8.5 percent shall be added to the 
sum of the operating cost component, the capital cost component, and 
the port and cargo handling cost component.
    (e) Determination of voyage days. The following assumptions shall 
be made in determining the number of preference cargo voyage days:
    (1) The voyage shall be round-trip with the return in ballast to a 
port or port range selected by MARAD as the most appropriate, unless 
the vessel is scrapped or sold after discharge of the preference cargo 
and does not return to the United States as a U.S.-flag vessel. In this 
event, only voyage days from the load port to the discharge port, 
including time allowed to discharge, shall be included.
    (2) Cargo is loaded and discharged as per cargo tender terms 
interpreted in accordance with the ``International Rules For the 
Interpretation of Trade Terms'' (INCOTERMS) published by the 
International Chamber of Commerce.
    (3) Total loading and discharge time includes the addition of a 
factor to account for delays and days not worked.
    (4) One extra port day is included at each anticipated bunkering 
port.
    (5) An allowance shall be included for canal transits, when 
appropriate.
    (6) Transit time shall be based on the average speed of vessels in 
the category. When calculating the vessels' average speed, individual 
vessel speeds will be

[[Page 3830]]

reduced by five percent for self-propelled vessels and ten percent for 
tugs/barges to account for weather conditions.
    (f) Determination of cargo carried. The amount of cargo tonnage 
used to calculate the rate shall be based on the tender offer or 
charter party terms. In instances when separate parcels of preference 
cargo are booked or considered for booking on the same vessel, whether 
under a single program or different programs, a guideline rate shall be 
provided based on the combined voyage.
    (g) Total rate. The guideline rate shall be the total of the 
operating cost component, the capital cost component, the port and 
cargo handling cost component, and the broker's commission and overhead 
component. The fair and reasonable rate can be expressed as total 
voyage revenue or be divided by the amount of cargo to be carried, as 
prescribed in paragraph (f) of this section, and expressed as cost per 
ton, whichever MARAD deems most appropriate.


Sec. 382.4  Waivers.

    In special circumstances and for good cause shown, the procedures 
prescribed in this part may be waived in keeping with the circumstances 
of the present, so long as the procedures adopted are consistent with 
the Act and with the intent of this part.

    By order of the Maritime Administrator.

    Dated: January 21, 1998.

Joel C. Richard,
Secretary.
[FR Doc. 98-1786 Filed 1-26-98; 8:45 am]
BILLING CODE 4910-81-P